IBM: Analyst Sees 1Q:18 Earnings as a “Slight Disappointment”; What’s Next?

GBH's Daniel Ives is bracing for the second quarter guide to put IBM shares in some hot water after last night's first quarter print.

IBM (NYSE:IBM) handed over a bit of a mixed bag yesterday evening for its first quarter earnings show, and the market is reacting by sending shares down almost 5% in pre-market trading. On a positive note, IBM delivered top-line upside on revenue and EPS. However, the concerns walk onto the scene when profit margins look weak and the second quarter guide has even bullish GBH Insights analyst Daniel Ives calling the numbers a “slight disappointment.” Look for this to drag shares down with “pressure,” warns Ives.

That said, the analyst reiterates an Attractive rating on IBM stock with a $180 price target, which implies a close to 18% upside from current levels. (To watch Ives’ track record, click here)

For the first quarter, the tech giant yielded a solid outclass against the Street, with $19.07 billion in total revenues and $2.45 in EPS, rising ahead of the Street’s $18.83 billion revenue estimate and $2.42 EPS forecast. Yet, considering the bottom-line was assisted by a one-time tax benefit, Ives notes that IBM came up short of consensus profit margin expectations- and this will add to the troublesome guide weighing down on the tech giant’s shares. True, the analyst notes headline revenue results stepped a bit beyond the Street’s estimates- but the “all important” Strategic Imperatives segment with 15% growth and 10% constant currency essentially met the Street when bulls had higher hopes. “Bulls were hoping for a clean modest beat on this key growth segment which represents the underpinnings of the IBM turnaround story in 2018 and beyond,” explains Ives. This segment continues to be the “main fuel in IBM’s diesel engine heading into 2018 as it represents roughly 50% of revenues and is growing double digits thus helping neutralize some of the massive headwinds on its traditional mainframe hardware business,” continues the analyst.

The IBM team maintained its EPS guide of $13.80 for this year, which falls under the Street’s $13.83. This is not a positive point from Ives’ eyes, considering Wall Street had been “hoping for a more upbeat outlook, although we believe prudence is the right strategy given the company’s challenges abound.”

Bottom line, “Margin softness, in-line Strategic Imperatives number, and unchanged guidance for the year was not enough for the bulls on the name and could put some pressure on shares. It all comes down to a combination of healthy cash flow and strong growth on next generation software areas (big data, analytics, cloud, security) to neutralize the legacy and mature areas of IBM’s product portfolio, which continue to weigh on the company as an anchor on the ship,” Ives contends, asserting that 2018 is “a major prove me year” for a challenged giant.

TipRanks indicates the tech giant has Wall Street split, but optimistic on its comeback prospects. Out of 15 analysts polled in the last 3 months, 6 are bullish on IBM stock, 7 remain sidelined, while 2 are bearish on the stock. With a return potential of nearly 6%, the stock’s consensus target price stands at $170.50.

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